CubeSmart is tempering its outlook for 2017 as it faces competition from new supply and reduced growth from occupancy gains. As it squares off with new competition, CEO Christopher Marr said the company must reach customers first and price their product accordingly.

“We are facing new supply entering our markets, therefore our proficiency in engaging the customer at the very beginning of their exploration of self-storage, and pricing the offer we present, is of critical importance,” Marr said during the Malvern, PA-based company’s recent earnings conference call.

The company expects year-over-year same-store revenue growth between 3.75% and 4.75% in 2017, and between 4% and 5% net operating income growth. That’s quite muted compared to the 7 percent same-store revenue growth the company achieved in 2016. CubeSmart generated same-store net operating income growth of more than 10 percent year-over-year.

Let the competition begin

Looking at the company’s top 12 markets, which include New York, Chicago, Miami, Houston and Dallas, Marr said they expect 180 competing stores to be delivered in 2017—an increase from the 125 new properties that opened in 2016.

The good news is that, as a whole, those markets are still undersupplied.

“The square foot per capita then in those markets is expected to grow about 5 percent, from 4.6 square feet to 4.9 [square feet],” Marr said.

That’s well below the national average of 6.8 square feet per capita. But some markets are getting more heated than others. Marr pointed to Raleigh where they expect storage per capita to climb 17 percent to 7.2 square feet per person.

Taking a bite of the Big Apple

While still undersupplied, new self-storage development in New York City is expected to increase the storage space per capita from 1.3 square feet per person to 1.6 square feet. That doesn’t sound like a lot, but it represents a 24 percent increase in new supply—which means CubeSmart will have to engage in more competitive pricing to capture and keep customers.

“New York is going to have pressure in the near-term on the existing stores,” Marr said. “It is manageable, but it will definitely have some impact on the same-store results in that market in the near term.”

The New York metro area is CubeSmart’s largest market with 48 same-store locations. Revenue for the quarter grew by 3.8 percent year-over-year. Marr said he expects positive growth in New York for 2017, but at pace below the same-store pool as whole.

CubeSmart is responsible for a fair amount of the new development coming to New York City. Five out of its six current wholly-owned and joint venture development projects are located in New York, the sixth being in Washington D.C. (The company also opened a wholly-owned development in North Palm Beach, Florida subsequent to December 31.) The company opened three new stores in New York in 2016.

Stepping back

CubeSmart has contracts to purchase four new facilities in 2017, two each in Illinois and Florida, at certificate of occupancy for $61 million. Aside from those, the company doesn’t have any other acquisition deals lined up, partly due to the widening gap between sellers expectations and CubeSmart’s cost of capital.

“Clearly there is a near term disconnect between rising cost of capital for Cube and seller expectations,” Marr said.

Marr said the company will be patient and only acquire properties that match its criteria, most likely sourcing deals from within its third-party management portfolio. That part of the business grew considerably in 2016; CubeSmart added 115 new stores to the platform for a year-end total of 316.

“Third-party stores represent nearly 40 percent of our portfolio at year end, creating a growing source of fee income, adding tremendous scale to our operating platform and providing an excellent source of future growth,” Marr said.

Marr said he expects the company will add at least another 50 new third-party stores in 2017, which will be a combination of operating stores and new developments.

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Alexander Harris